JAN 26
1999 SM calls for global financial standards
He says the US, Japan and EU should reduce the wide fluctuations in their
currencies' exchange rates
By JASON LEOW
THE international financial system should be restructured in such a way that countries
which participate more fully in it will derive more benefits, Senior Minister Lee Kuan Yew
has said in an essay published in Time magazine.
Noting, however, that it would take many years to reach an agreement on such a system,
he suggested that steps be taken in the meantime to reduce the volatility in the exchange
rates of the currencies of the United States, the European Union and Japan.
If the three could reduce the wide fluctuations in their currencies' exchange rates,
those of developing countries would become less volatile, since most of their currencies
were pegged to these three.
Mr Lee said this in an essay titled, "Fix the global financial system",
published in the February 1 issue of the American news magazine.
The Asian crisis, he noted, had shown how fragile the world financial system was and
the perils of globalisation for small open economies.
The crisis-hit countries had suffered deep recessions, gross currency devaluations,
high unemployment and inflation, and acute political and social unrest, he said.
"The 'punishment' they suffered has been extreme and totally disproportionate to
any crime that Thailand, Indonesia or South Korea may have committed.
"Their crime was that their private corporations and banks had over-borrowed from
willing foreign banks," he said.
The IMF and finance ministers of the Group of Seven (G7) advanced industrialised
economies had encouraged developing countries to liberalise their financial systems.
But they "did not warn them that massive capital flows could be dangerous for
those with weak banks, poor supervisory controls and lax corporate governance," he
added.
To stabilise the global financial system, the US, EU and Japan need to agree on the
institutions and standards that regulate international financial movements.
There was also a need for an institution like the IMF or World Bank to act as the
"lender of last resort", so that crisis-struck economies need not go into deep
recession when foreign capital flowed out suddenly.
Emerging countries could also protect themselves against the risks inherent in
financial globalisation.
He said: "They need to strengthen their domestic financial systems and be more
transparent.
"Their key economic data should be published and should meet international
standards. If investors know where they stand, there would be less of the 'rush to the
exit' panic at the first sign of trouble."
He suggested that the IMF, the World Bank and key regulatory agencies like the Bank for
International Settlements (BIS) in Basel should draw up internationally agreed codes of
best practices on monetary, financial and fiscal policy and corporate governance, which
countries could benchmark themselves against.
Developing countries would have to weigh the cost and benefits of full or partial
participation in the global economy.
Those with weaker financial structures, he noted, might need some form of capital
controls, preferably market-based.
"China and India, two countries with such controls, have escaped the worst effects
of the crisis.
"The cost will be lower foreign capital inflow and slower growth, but greater
stability should result," he said.
The G7 countries should take the lead in upholding standards, he said, adding:
"Best practices begin at home. They need to hold their own domestic institutions to
high standards -- including their investment banks and hedge funds."
He concluded: "The challenge to the IMF, World Bank, BIS and G7 finance ministers
is to structure a system such that the more fully a country participates in the global
financial system, the more benefits it derives."
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